Former Procter & Gamble CEO A.G. Lafley Discusses Risk and Strategy

In 2012, Procter & Gamble celebrated its 175th anniversary. A.G. Lafley was no longer with the company, having retired as president and CEO in 2010 after 10 years in that post and 33 with P&G, but his tenure gave the consumer products giant even more to celebrate on its birthday.

The company’s market value grew by more than $100 billion during his time at the top, as he focused on P&G’s strengths, expanded into new locations and helped the firm grow its number of billion-dollar brands — including Tide, Crest, Duracell, Gillette, Bounty, Olay and Pampers — from 10 to 24.

Together with Roger L. Martin, dean of the Rotman School of Management at the University of Toronto, Lafley documented his strategic outlook in the new book Playing to Win: How Strategy Really Works. We recently sat down with the former P&G CEO to get his thoughts on how strategy and risk intertwine.

A.G. Lafley: I think the really good companies are thinking hard about what constitutes enterprise risk. And that depends significantly on what industry and businesses they try to play in.

If you think about P&G, we were a manufacturer of everyday branded products, but at the time I took over in 2000, it was a company that had a $6 billion to $8 billion food and beverage business. So when you’re in [the business of] ingested products, regulated by the FDA and others, that presents a different risk profile from household cleaning products. And at the same time, we were in health-care products.

So I guess the first thing I would say is that your risk profile depends mightily on the industry you’re in. Fundamentally, your risk management choices, capabilities, programs and processes come directly out of your strategy. Because, first of all, the issue is which consumers you choose to serve. It’s which geographies you try to play in.

We would have a different type of risk profile if we didn’t choose to go into China, Vietnam, the Arabian Peninsula and Nigeria. If we stayed in the United States and Canada, that would be a very different geographic, political and economic risk profile.

But we believed we were a global company and we believed we would have a diversified portfolio of industries, so then you try to manage the risks in each part of the portfolio that are unique, and you focus on the ones that could extend from one part to another.

But you make your risk management bed when you make your strategy choices.

RM: If you’re making paper towels, for example, you might not have the option to make more money per paper towel no matter how efficient you become? So since you essentially need to go to China to make more profit, does your strategy kind of make that choice for you?

Lafley: Interestingly, with our manufacturing, 95-plus percent of it was done in the country or the region where we distributed and sold the branded product. You have to remember that most of our branded products sell for $5 or $10 or less — maybe a few are up to $20. So you can’t ship them very far. You lose all the profit. The logistics’ cost is higher than the manufacturing expense.

Pretty much, what we manufactured in China, we sold in China. What we manufactured in Mexico, we sold in Mexico. What we manufactured in the United States, we sold in the United States.

But you’re definitely right that we were in different countries because we were interested in those consumers and interested in those markets. That was our motivation. But you take on different risks serving those different markets.

RM: Would you say, especially in strategic terms, you’re someone who is more of a risk taker or more risk averse?

Lafley: The first thing I would say is that anyone who is in business is a risk taker. Private enterprise is not for the faint of heart.

The second point I would make is that at P&G in the last decade, when I was lucky enough to serve with a team and a great organization as their leader, half of our growth was organic. Which means it came from innovation—product innovation and brand innovation—that we created or we created with partners.

And innovation is a risky business. In the consumer products world, 80% to 85% of all new brands and products fail in three to five years. It’s risky, and that was half of our revenue growth.

The other half of our revenue growth came from acquisitions and mergers. And mergers and acquisitions are a risky business. Over half of those fail. By some calculations, 60% or 70% or more fail.

By definition we were in risky businesses, and you manage [those risks] as best you can. What we tried to do was minimize the risks we could control and influence so we could deal with the risks that were outside of our influencing control.

“Playing to Win” by Lafley and Roger Martin, Rotman School of Management dean, details how strategy helped P&G improve brands like Olay and acquire companies like Gillette.

RM: Were there any strategic decisions that you made that you thought were a very high risk but you were certainly going to pursue it anyway?

Lafley: We made a big push into China and Southeast Asia, a big move into Eastern Europe and Russia, and a big move into the Middle East and Africa.

I think we felt that we had to make those moves because our business is driven by demographics: where are the babies born, where do the households form, where does economic growth drive a rising middle class? There is a huge middle class growing in emerging markets, and we felt like we had to be there because that’s the biggest part of our market. We serve middle-class families, so that was a risk we felt was worth taking.

RM: So, the bigger risk would be not being there?

Lafley: Exactly, the bigger risk is not being there. Or ceding it to a competitor. And then you may chose to go there later, but it will cost you five times as much.

RM: What were some of the other major risks you faced during your time at Proctor and Gamble?

Lafley: I would argue, at least in the business I was in, the first risks we thought about were consumer-based. A lot of consumer safety issues, both in circumstances of normal uses and — frankly, this is the really scary one for a lot of consumer companies — any foreseen misuse of the product.

Generally people don’t harm themselves by using the product as directed. But they get in trouble when they misuse products.

RM: How do you discover those misuses? Through lawsuits? Research?

Lafley: Honestly, all different sorts of ways. We had a 24/7, continuous opportunity for communication to us directly from consumers. They can call us. They can connect with us online. They can come into one of our hundreds of locations.

We wanted bad news to travel places as fast as good news. If we had a consumer-safety issue, we wanted to know about it right away and then begin to act upon it.

RM: How did you view the threat from natural disasters?

Lafley: We had 150 manufacturing plants going at any given point in time, and we had to make sure they are capable of operating, in many cases, 24 hours a day, seven days a week. And then if we had an untoward event — and earthquake, a hurricane — we had to have all our countermeasures in place to deal with those very-real phenomenon.

I personally lived and worked through the Kobe earthquake [in Japan in 1995]. I personally lived through Hurricanes Katrina and Rita. I personally lived through the tsunami that struck Thailand, Indonesia, India and Sri Lanka.

Those things happen, and you have to have risk mitigation in place to deal with them.

RM: For you, on your level, was the business continuity aspect one of the largest ramifications you felt like you faced?

Lafley: Huge. Continuity of operations were huge. Continuity with our consumers and our retail and distribution customers around the world. Continuity with our global, regional and local supply base.

There was obviously the whole production and distribution side, but just as important was the whole information side. How long could we go without IT system A? How long could we go without IT system B? We built in a lot of redundancy, and we built a lot of backups, because we were only as good as our information network.

RM: With a global supply chain and a dependence on shipping, were political risks high on your radar?

Lafley: You always have political and economic volatility. I used to have this conversation every year: We know there is going to be political instability in a couple of countries around the world — we wish we knew which two it would be this year.

I’ve lived through a series of Latin American disruptions. I spent eight years of my career in Asia, so I lived through the “Asian flu,” the economic crisis in the mid-90s. Right now, people are working through the series of Middle Eastern and African crises.

You know you’re going to have them, but you’re not sure exactly when and where they are going to come. You have to have continuity and contingency plans. We used to run simulations. We ran simulations at the country level and at the business-unit level. And we ran simulations at the corporate level if something went wrong politically, economically or if we had a kidnapping.